Don’t be scared — now is the time to start investing in real estate

by Mike Summey, Weekend Millionaire published October 19, 2007 12:15 am

For new investors, structuring a first deal can be traumatic. You ask yourself, “What if I miscalculate the numbers?” “What if I can’t get financing?” “What if I make the sellers mad with my offer?” “What if I can’t make the payments?”

I had these same concerns when I started investing. All investments have risks, and real estate is no different. The art is to minimize the risk by learning as much as possible about the property, the neighborhood, market conditions, rental demand and other factors. If you err, err on the side of caution. No one ever got hurt by a property they didn’t buy.

There are three elements to a strong real estate market: buyers who want to buy, sellers who want to sell and ample financing. When these elements are present and in proper balance, a property that is priced fairly and given adequate marketing should sell rather quickly. If a property remains on the market long enough to force the sellers to take a lower offer, either it was overpriced or there are problems that have kept buyers from making higher offers.

Perhaps the neighborhood has an unsavory reputation, and you don’t know the area well enough to recognize that problem. Perhaps there are sewer or water problems that aren’t obvious when you inspect the property. Hidden negative factors like these can cause other buyers to shy away from the property, so research an area before you buy, especially if a deal looks too good to be true. Conversely, when one or more of the elements required for a strong real estate market weakens, it can result in great deals on properties that don’t have hidden problems.

Suppose you find a good deal on a property, but half of the houses in the neighborhood are for sale. You should determine if the problem is the neighborhood or weak market conditions.

Fortunately, there is information available to help you make this judgment. For example, in early October I read an article stating that home sales for the previous month were at a seven-year low and unsold inventory was at a 37-year high. That’s an indication of a strong imbalance and a good sign that the market is weakening and will produce some great deals.

If you plan to embark on a long-term real estate investing career, the next several months may be the best time to do so in the last 50 years.

On the other hand, if you want to speculate in real estate by buying, fixing up and flipping properties, the coming months may be the worst time to do so in the past 50 years. Long-term investors purchase properties that produce enough cash flow to pay all of the expenses and still have enough left over to pay the mortgage and provide a return on investment. The best time to find deals like this are when the sales market is at its worst.

The fixers and flippers fare well when the sales market is red hot, but they often go belly up when the market cools and they are caught holding properties they can’t sell.

Here’s a tip: Don’t let all the negative publicity about the declining real estate market scare you. Now is the time to start building a portfolio of income producing properties that can build wealth and secure your retirement.

Mike Summey is co-author of McGraw-Hill Publishing’s best-selling Weekend Millionaire book series. He can be reached at successtips@aol.com, or visit www.weekendmillionaire.com.